1. Environmental Analysis

2. Topics Purpose of General Environmental Analysis Gathering Information
Competitive Environment
Key Success Factors
Competitive Changes During Industry Evolution
Strategic Groups
National Competitive Advantage
Internal Environment

3. Purpose of General Environmental Analysis
Organizations are affected by conditions in the environment
Managers need to be aware of these conditions in order to
Take advantage of opportunities that can lead to higher profits
Reduce the impact of threats that can harm the organization’s future

4. Gathering Information for External Environmental Analysis
Managers need information in order to know and develop an understanding about what is happening in the external environment
Three approaches to information gathering:
Scanning: general surveillance of environmental changes; looking for early signals of changes
Monitoring: close attention to specific developments that could affect the organization
Competitive Intelligence: following actions of competitors

5. Sources of Environmental Data
Internal sources may also be a good source of data on customer needs, attitudes, and behavior. The organization's own records are the best source of data on current objectives, performance, and available resources.
The sheer volume of available information on the economy, our population, and business activities is the major strength of most government data sources.
The articles and research reports that are available in periodicals and books provide a gamut of information about many organizations, industries, and nations.
Commercial sources are almost always relevant to a specific issue because they deal with the actual behaviors of customers in the marketplace.
The best approach to secondary data collection is one that blends data and information from a variety of sources.
If needed secondary data is not available, out of date, inaccurate or unreliable, or irrelevant to the specific problem at hand, the manager may have little choice but to collect primary data through marketing research.

6. Overcoming Problems with Data Collection
One of the most common problems is an incomplete or inaccurate assessment of the situation for which data is being gathered to address.
Another common difficulty is the expense of collecting environmental data.
A third issue is the time it takes to collect environmental data.
A final challenge is finding a way to organize the vast amount of data and information that are collected during the environmental analysis.
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7. Three Areas for Analysis
General Environment
Competitive Environment
Internal Environment

8. General & Competitive Environments
General Environment
Demographics
Competitive
Environment
Threat on new entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products
Competitive rivalry
Global
Political/Legal
Sociocultural
Technological
Macoreconomic 8

9. GENERAL Environment DEMOGRAPHICS
Characteristics of a country’s population
Size of population and growth rate
Age distribution of population
Education levels
Income distribution
Ethnic diversity
Geographic distribution

10. General Environment POLITICAL/LEGAL
Political and legal conditions affecting business
Government policies toward business
Investment incentives
Business regulation: labor, environment
Education priorities
Budget conditions and plans

11. General Environment TECHNOLOGICAL
Technological developments relevant to a business
Telecommunications
Internet
On-line training
Product and process innovations

12. General Environment MACROECONOMIC
Impact of the economy on business
Size and change in gross domestic product
Per capita income levels
Inflation rate
Interest rates
Foreign trade deficit or surplus
Unemployment
Rates of saving and investment

13. General Environment SOCIOCULTURAL
Influence of values, beliefs, and lifestyles of a country on business
Family relationships
Attitudes about work
Living arrangements
Styles of entertainment
Attitudes toward health

14. General Environment GLOBAL
International developments that can impact a business
Rise of China as economic power
Rising global trade and WTO
Intellectual property protection
Important political events: Iraq war
Search for low cost suppliers

15. COMPETITIVE Environment
Managers must understand the conditions of competition within their industry
Porter Five-Forces Model of Competition (determining the attractiveness of an industry)
Key Success Factors
Competitive Changes During industry Evolution
Strategic Groups
National Competitive Advantage

16. Porter’s Five Forces Model of Competition Suppliers of Key Inputs
Substitute Products
(of firms in
other industries)
Suppliers of Key Inputs
Rivalry
Among
Competing
Sellers
Buyers
Potential
New
Entrants

17. Threat of New Entrants
Fundamental question: how easy is it for another company to enter the industry?
Factors making easy entry to industry
Low economies of scale
Low product differentiation
Low capital requirements
No switching costs for buyer
Easy access to distribution channels
Little government regulation

18. Supplier Power
Fundamental question: how badly does a supplier need your business?
Factors giving power to supplier:
Supplier industry dominated by few firms
Buyer is not important to customer
Supplier’s product is important input to buyer’s product
Supplier’s products have high switching costs
Supplier can “integrate forward” and become competitor of buyer

19. Threat of Substitutes
Fundamental question: what other products or services could perform the same function as your products or services?
Factors indicating high threat of substitutes:
Few switching costs for buyer
Price of substitute lower or quality higher than for your products
Firms offering substitutes have high profitability

20. Buyer Power
Fundamental questions: How badly does a buyer need your products or services?
Factors contributing to high buyer power:
Few buyers compared to the number of sellers
Buyers purchases high relative to seller’s sales
Products are undifferentiated
Buyer has low switching costs
Buyer has low profits
Buyer can “integrate backward” and supply the product to itself

21. Competitive Rivalry
Fundamental question: how intense is competition in the industry?
Factors leading to high competitive rivalry:
Numerous or equally balanced competitors
High fixed costs
Slow industry growth
Lack of differentiation or switching costs
High strategic stakes
High exit barriers

22. Four Basic Types of Competition
Brand Competitors: market products that are similar in features and benefits to the same customers at similar prices
Product Competitors: compete in the same product class, but with products that are different in features, benefits, and price
Generic Competitors: market very different products that solve the same problem or satisfy the same basic need
Total Budget Competitors: compete for the limited financial resources of the same customers

23. The 6-W Model Who are our current and potential customers?
What do our customers do with our products?
Where do our customers purchase our products?
When do our customers purchase our products?
Why (and how) do our customers select our products?
Why do potential customers not purchase our products?

24. Key Success Factors
In many industries, there are certain actions or practices that a business must follow in order to compete in the industry.
May need effort to distinguish company from competitors

25. Examples of Key Success Factors in Selected Industries
Pharmaceuticals
research and personal selling
Beer
advertising and distribution
Restaurant
quality food and service
Retailer
location and priced-for-quality

26. Changes in Competition During Industry’s Evolution
Over time as an industry evolves, the nature and basis of competition changes
Five Stages
Embryonic—introduction of product
Growth
Shakeout
Mature
Declining

27. Stages of Industry Life Cycle
Demand
Embryonic
Mature
Declining
Shakeout
Growth
Time

28. Requirements in Each Stage of Industry’s Evolution
Embryonic: Know-how, educating customers, opening distribution channels
Growth: Know-how for continued innovation, financing, build demand
Shakeout: Dominant market position, low cost producer, high capacity
Maturity: low cost production, brand loyalty
Declining: lowest cost production, reduce capacity

29. Strategic Implications of the Five Competitive Forces
Competitive environment is unattractive from the standpoint of earning good profits when:
Rivalry is strong
Entry barriers are low and entry is likely
Competition from substitutes is strong
Suppliers and customers have considerable bargaining power

30. Strategic Implications of the Five Competitive Forces
Competitive environment is ideal from a profit-making standpoint when:
Rivalry is moderate
Entry barriers are high and no firm is likely to enter
Good substitutes do not exist
Suppliers and customers are in a weak bargaining position

31. Strategic Groups
Companies do not compete against all companies in an industry
Companies compete against several other companies that follow similar strategies
A strategic group consists of those rivals with similar competitive approaches in an industry
Examples ways of competing:
Price -- Range of products
Innovation -- Customers served
Research
Quality

32. Procedure for Constructing a Strategic Group Map
STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics STEP 3: Assign firms that fall in about the same strategy space to same strategic group STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales

33. Example: Strategic Group Map of the Video Game Industry
Arcades
Arcade operators
Publishers of games on CD-ROMs
Home PCs
Sony, Sega, Nintendo, several others
Types of Video Game Suppliers/Distribution Channels
Video game consoles
MSN Gaming Zone, Pogo.com, America Online, HEAT, Engage, Oceanline, TEN
Online/Internet
Low
(Coin-operated equipment)
Medium
(Console players cost $100-$300)
High (Use PC)
Overall Cost to Players of Video Games

34. Nation-State and Competitive Advantage
A country may provide a competitive advantage for a company
Need to identify national factors in order to determine
Where most significant competitors will come from
Where to locate production activities
Porter’s Diamond of Determinants of National Competitive Advantage

35. Determinants of National Competitive Advantage
Strategy,
Structure &
Rivalry
National Competitive Advantage
Factor
Endowments
Demand
Conditions
Related and
Supporting
Industries

36. Strategy, Structures and Rivalry
Different management ideologies lead to different emphases within a company
Japan and Germany both have engineers in top management and those country’s companies concentrate on process and product improvement
Intense domestic rivalry leads to product improvements and cost reduction in order to compete for domestic customers

37. Demand Conditions
Large growing markets provide foundation for global competition
More significant, sophisticated and demanding consumers force companies to innovate and improve their products
Advances in products, services and standards improve companies’ knowledge and capabilities for selling in other world markets

38. Related and Supporting Industries
Provide inputs and capabilities that help a company to improve its own products and capabilities
Helps reduce manufacturing costs through cost-effective, timely methods
Ongoing exchange of knowledge through research and development and joint projects improves both suppliers and companies

39. Factor Endowments
Availability of traditional factors of production— land, labor, capital, entrepreneurship— provide cost advantages to companies located in countries possessing those factors
More significant, countries and their companies can create new factors such as a knowledgeable workforce and infrastructure that is rare and difficult to imitate
Factor endowments less important than the speed and efficiency of deploying those resources.

40. Conclusions About Determinants of National Competitive Advantage
Firms succeeding in global markets first succeeded in intense competition in home countries
Competitive advantage for global firms comes from continuous improvement, innovation, and change.

41. INTERNAL ANALYSIS How can we assess the resource capabilities?
Resource Based View
Each firm has three basic kinds of Resources
Tangible assets
Ford’s Cash Reserves
3M’s Patents
Georgia Pacific Land holdings
Coca Cola’s formula
Intangible assets
Nike - Brand Name
Dell – Reputation
GE- Welch’s Leadership
Organizational capabilities
Dell’s Customer Service
Sony’s Product Development
3M’s Innovation

42. How resources become valuable
Competitively Superior
Walmart’s Logistics – Allowed better pricing
Resource Scarcity
OPEC’s Oil Reserves – Finite oil reserves
Appropriability
Who profits from a resource?
“Mickey Mouse does not have an agent”
Inimitability
Priceline’s pricing for air tickets
Wendy’s Drive Through
Path dependency - Steinway with Pianos
Causal ambiguity – South West Airlines
Economic Deterrence
Durability
How long will the competitive advantage last?
Patentable products – longer durability

43. Value Chain Analysis Disaggregates a business into sets of activities
Primary Activities – Inbound logistics --- Operations ---- Outbound logistics ---- marketing and Sales and service
Support activities – General Administration, HRM, R&D, Systems Development
How to do a VCA
Identify key activities
Allocate costs to each activity
Identify the activities that differentiate the firm
Examine the Value Chain
Different activities may be important – industry and strategy
Importance of activities can vary based on a company position in a larger scheme of activities

44. Making meaningful comparisons
Comparison with past performance
Trend analysis – Where are you relative to the past.
Stages of Industry Evolution
Emergence, Growth, Maturity and Decline
Strengths or competencies needed at each stage are different
Benchmarking with the competitors
Key competitors
Best practices irrespective of industry